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Environmental taxes and competitiveness

Some transport-related tax-bases. Taxes on motor vehicle fuels. Exist in all OECD countries -- and many otherCame into use at an early stage -- primarily for fiscal reasonsIn some countries several different taxes are levied on petrol and dieselThere is sometimes differentiation according to envi

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Environmental taxes and competitiveness

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    1. Environmental taxes and competitiveness

    2. Some transport-related tax-bases

    3. Taxes on motor vehicle fuels Exist in all OECD countries -- and many other Came into use at an early stage -- primarily for fiscal reasons In some countries several different taxes are levied on petrol and diesel There is sometimes differentiation according to environmental criteria There is often lower rates for heavy goods vehicles and/or public transport

    4. Tax rates on unleaded petrol and diesel 1.1.2002 – “Normal rates”

    5. Motor vehicle taxes Three main categories Taxes on first-time purchase of the vehicles Annual taxes levied on the right to use the vehicle Charges more directly linked to the road use Often introduced primarily for fiscal reasons All categories have environmental impacts – and can be environmentally “modulated”, e.g. related to Engine size or power Vehicle weight CO2 emissions, according to vehicle type certification

    6. Fuel Efficiency of new cars and real gasoline price in USA

    7. The competitiveness issue

    8. What is “competitiveness” For an individual business enterprise, competitiveness is primarily a matter of being able to produce products that are either cheaper or better than those of other (domestic or foreign) firms.

    9. Applying the concept of competitiveness to industrial sectors or to whole economies is more controversial. One key reason is that it is necessary to take account of the macroeconomic adjustment mechanisms (such as exchange rate changes) that would be prompted by a deteriorating trade balance, or rising output prices. What is “competitiveness” (Cont)

    10. The principle of comparative advantage implies that a country can always trade successfully in some commodity, even if its firms are inefficient (or burdened with environmental taxes or regulations), while the same is not true of an individual business enterprise. Whether environmental taxes harm a country’s competitiveness can be gauged by whether or not they require a fall in the country’s exchange rate, to restore macroeconomic balance. What is “competitiveness” (Cont)

    11. Assessing competitiveness impacts Assessing the impact of environmental taxes on competitiveness requires a clear specification of what is the alternative “baseline” policy against which the impact is being assessed. Two dimensions are particularly relevant: The impact on the government budget: is the comparison done on a revenue-neutral basis? The impact on the environment: is the comparison between two ways of achieving an equivalent standard of environmental protection?

    12. Competitiveness impacts of taxes applying to heavy goods vehicles Direct impacts on road transport companies in different countries Direct impacts on road transport vs. other transport modes Indirect impacts on other sectors depending on their transport intensities. Indirect impacts on different regions depending on their transport intensities.

    13. Impacts on road transport companies Differences between countries in fuel tax rates is unlikely to have very large impacts on the competitiveness of transport companies involved in international freight, as they will all (try to) buy their fuel where it is cheapest. Firms involved in international freight could gain an advantage compared to firms only operating in a high-tax country.

    14. Large differences between countries in taxes on the purchase of heavy motor vehicles could have stronger impacts on international competitiveness. However, differences in other taxes of relevance to the transport firms (labour, profits, etc.) could cancel out much of the differences in vehicle costs. Impacts on road transport companies (Continued)

    15. Road user charges based on (e.g.) tonne-km driven, location of road use, congestion levels and environmental characteristics of the vehicles would not distort international competitiveness of the firms. Firms using “clean” vehicles would obtain an advantage – but that would be an intended outcome, not a distortion. The aim should be to cover marginal social costs, not to charge (foreign) firms for average infrastructure costs. If it is deemed that foreign users should pay “their share” of infrastructure costs, it would be better to use fixed annual charges for such a purpose. Impacts on road transport companies (Continued)

    16. Impacts on road transport vs. other transport modes In order to achieve a welfare optimum, it is necessary to correct two types of market failure in transport: the under-pricing that follows from the absence of taxes on externalities, and the over-pricing that follows from the absence of transfers to cover fixed costs. These two current deviations from optimal prices do not offset each other: the first is most acute in the case of congested urban roads, the second is most acute in the case of rail. To correct one without the other will result in a sub-optimal outcome.

    17. Increased taxes/charges on road transport would (of course) weaken the competitiveness of this mode compared to rail, air and water transport. Recent ECMT work strongly indicates that such a shift in favour of rail would be welfare enhancing. Optimal prices for using trucks on urban roads were estimated to be around 40% higher in peak periods than the prices prevailing in 2000. Non-taxation of air transport would remain a problem. Impacts on road transport vs. other transport modes (Continued)

    18. Impacts on other sectors Increased road transport taxes/charges would affect other sectors of the economy differently, depending on their road transport intensities. However, in most cases, road transport costs would only constitute a minor share of total costs. Hence, the impacts on different sectors’ competitiveness are likely to be modest.

    19. Increased taxes/charges on road transport in congested /polluted areas in the centre of Europe would entail increased transport costs for firms in peripheral parts of the continent in reaching their markets. Such cross-border freight should, nevertheless, be charged in the same way as local trucks – based on non-discrimination, economic efficiency and environmental effectiveness. On the other hand: Charging for all should be based on marginal social costs – and not be used as a means to recuperate average infrastructure costs. Impacts on different regions

    20. Large distances from peripheral regions to the markets represents a real comparative disadvantage that one – from the perspective of economic efficiency – should not try to “subsidise away”. One should instead improve transport infrastructure of these regions – if that passes normal cost-benefit analyses. In addition, regional development policies can be applied to address income distribution concerns. Impacts on different regions (Continued)

    21. Where to find more information www.oecd.org/env/taxes www.oecd.org/env/tax-database

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